How Airlines Can Recover From Business Travel Shortfall
The COVID 19 Pandemic has been rapidly transforming industries around the world into changing their strategies. One of the industries most impacted is the aviation industry. Airlines have seen less travel from quarantines; many planes were grounded, and experts say that the reduction in passengers is likely to continue due to the normalization of remote business meetings. Studies show a potential long-term reduction of up to 36 percent in business travel, which makes up almost three quarters of revenue from passengers.
In order to compensate for decreased revenue due to decreased demand in business travel, airlines could take these measures:
-Require a system of vaccine passports where possible or incentivize vaccinated passengers
-Increase cargo loads for shipping by converting passenger planes to shipping planes
-Bring increased revenue from motivated airline rewards members
-Incentivize Increased Leisure Travel
Vaccine passports will require individuals who were vaccinated to show proof of vaccination prior to traveling. Vaccine passports were first discussed in the late 19th century and have been an ongoing debate that was introduced in 1897 for the fear and spread of the plague and was later brought back to discussion for smallpox, yellow virus, and now COVID-19. Although this topic arises during global pandemics, to this day, International Health Regulations backed by the World Health Association has only specified the yellow fever, as a virus that nations may require proof of vaccination for.
These passports are not a complete solution to prevent travelers and diseases from spreading but are a method of prevention that airlines and airports can take in to provide security and advertise safe and healthy travel options. A few foreign airlines such as British Airways and Ryanair Holdings PLC are two examples of airlines that have already begun implementing vaccinated travel to a certain degree.
Aviation usage dropped astronomically in 2020 and prevented many people from flying during the peak of the COVID-19 pandemic. People were scared who they would come in contact with while at airports and in planes. Recent polls show more confidence by American citizens in traveling. As of April of this year, a year after the start of the pandemic, eight in ten Americans see the situation improving. While many may feel more confident in air travel, a sudden surge of a smaller epidemic or moderate flu season would rekindle the same fear that the majority of the world had during COVID, which could cause more reluctance for air travel.
We have seen historically that immediately following major events and catastrophes, the vulnerability of the aviation sector is recognized. Following the SARS outbreak in 2003, H1N1 in 2009, oil crisis in 1973, Iran-Iraq War in early 80s, 9/11 attacks, and other events throughout history, we have seen that aviation travel takes a hit and the aviation industry has very little control over their consumers decisions. However, if airlines or governments who team up with airlines deem vaccination records as necessary for travel, airline customers will know that traveling won’t be as much of a risk because of the safety steps that airlines and airports have taken.
Shortly after 9/11, on November 19, 2001 all US airports quickly implemented the TSA which requires all flyers to remove multiple articles of clothing and screen all items. This is now viewed as commonplace when it comes to traveling through the air. Similar to the introduction of TSA, the implementation of enforcing some sort of vaccination passport will allow travelers to continue to travel during future pandemics because those who are flying will be deemed as healthy and safe.
Having travelers required to go through another level of security and show a vaccine passport could and probably will frustrate passengers. 44% of U.S. voters would be in support of a required COVID-19 vaccination passport, 41% would be against such a requirement, and 15% would be unsure of the idea. Since vaccinations are not mandatory for any US individual, some may feel making vaccine passports a requirement to travel would limit the rights individuals have on their body and choices. Because of this, the vaccine passport can be used as an incentive in which it will allow line skipping and seating priority to those who provide these credentials.
Although this new policy is hard to imagine, COVID-19 has already provided us with the unimaginable of essentially shutting down the entire world for the span of an entire year; it wouldn’t be too much of a stretch of the imagination to think that the airlines will attempt to look for extreme solutions to maintain business, usage, and trust from its consumers for the next time the world has to go through a worldwide pandemic or any other global emergency.
Branching out using credit card programs to reward people airline miles
Airlines may have to take extra effort to recover losses from business travel in the form of marketing to more customers through frequent flyer programs. Airlines make money off of flights themselves, but their overall revenue relies heavily on these programs and with the pandemic decimating people’s plans to fly frequently, these rewards programs are more vital than ever in assuring an airline stays afloat financially. The Financial Times pegs the value of Delta’s loyalty program at a whopping $26 billion, American Airlines at $24 billion, and United at $20 billion. All of these valuations are comfortably above the market capitalization of the airlines themselves. Delta is worth $19 billion, American $6 billion, and United $10 billion. This shows that without these programs, most of these major airlines are actually worth large negative amounts.
But what are these programs exactly? Frequent flier programs allow for customers to use credit cards to make everyday purchases that earn them sky miles with certain airlines. These miles can then be redeemed for flights with an associated airline. Airlines make up to an average of 2.5 cents per mile when they sell these miles to banks which creates huge profits.
In mid 2020, all major US airlines changed the criteria required for reward programs and extended the status of many elite memberships through the end of the 2021 calendar year in an effort to appeal and retain customers. Companies like United and American have actually lowered the qualifications for customers to reach higher tiers in the programs themselves.They also have allowed for earned miles to rollover into and throughout 2021 so that folks can still redeem their miles as travel starts to become an option once again.
Many airlines have restructured their deals and contracts with financial institutions to allow for a greater number of miles to be earned when purchases are made using co-branded credit cards. For example, Delta’s partnership with American Express has been adjusted so that customers can earn up to 4x more skymiles per dollar spent in grocery stores, and likewise, United Airlines has upped their game by allowing customers to earn 3-5x more skymiles when their chase co-branded credit cards are used on groceries each month. With airlines continuing to adjust and revamp their frequent flier programs, customers’ loyalty and willingness to pay will continue to increase. With this increasing revenue, airlines will be able to stay afloat despite the decreasing business demand.
Passenger to Cargo Plane Conversions
Another method in which the airline industry has shown signs of recovery after the pandemic-induced business traveler loss is that companies are converting passenger planes that would otherwise be retired early for scrap, into cargo planes. This allows airlines to find uses for passenger planes that would otherwise be unprofitable to sell because used passenger plane values plummeted due to the permanent reduction in airline business travelers.
This makes sense for airline companies to do because the value for passenger airliners has fallen by 20%-40% since the beginning of the pandemic. The value of cargo planes however hasn’t fallen nearly as much due to an increase in demand for air freight. Normally most passenger planes carry a small amount of cargo along with passengers, but fully converted planes can help to satisfy the increased demand that normal passenger planes currently can’t meet. Boeing estimated that to satisfy current and expected demand for air freight and ecommerce that 2,430-freight aircraft will need to be put into service, and it estimates that 1,500 of those planes will come from passenger to cargo conversions. Financially it makes sense for these passenger planes that are no longer needed to be converted into cargo planes because the price of a converted medium sized plane is around $20- $30 million, whereas that same plane new would be more than $70 million. Not only is there a win win scenario between passenger airlines and air freight companies in terms of converting passenger planes into cargo planes there’s another benefit as well. The total time from when you order a new plane from Boeing, to haven taken delivery of the plane is usually around 9-12 months. Whereas the passenger to cargo plane conversions typically take around 4 months to convert for an equivalently sized plane. The loss in business travelers from the pandemic certainly dealt a massive blow to passenger airlines with a loss of 75% of their revenue, but these conversions are helping them to bounce back.
Increase Leisure Travel
According to Trodent Development Corp, “business passengers represent 75 percent of an airline’s profits despite only being 12% of their total passengers. But the money is well spent: every $1.00 spent on business travel creates $15 of profit for increased sales”. The number of business travelers has decreased drastically since COVID-19 started, and projections expect the number of business travelers to remain low, as more and more companies adopt Zoom or Microsoft Teams to conduct their meetings. Airlines will need to increase leisure travel in the wake of falling business travel.
In recent weeks, airlines have announced plans to fly more than 150 new domestic routes as they try to rule out pockets of demand and stimulate new markets by connecting pairs of cities that previously hadn’t been easy to travel between. United Airlines, for instance, is doubling down on a strategy it first tried out last summer, offering direct links between smaller Midwestern cities and popular vacation destinations. Starting in late May, the airline plans to use 50-seat planes for nonstop flights from such places as Cleveland, Cincinnati and Milwaukee to Hilton Head in South Carolina, Pensacola in Florida, and Portland in Maine.
Another company that expanded their service was Southwest Airlines, which plans to begin service to Myrtle Beach, South Carolina, Palm Springs, California, and Bozeman, Montana, this summer. Here you can see those and some of the other 17 destinations it has added or announced in the pandemic.
In addition to that, while airlines begin offering and servicing new departures and destinations, fares are dropping, stimulating leisure travel. For example, shortly after February 23, Spirit announced it would serve Louisville, Kentucky. Then a survey conducted by Hopper, a growing website and app for booking flights and hotels, found competing fares from Louisville to Las Vegas had subsequently dropped from $330 to $225 for a round-trip.
According to Savanthi Syth, an airline analyst at Raymond James & Associates, a wealth management company with approximately $1.02 trillion in client assets, the surge and expansion of new and traditional low-cost carriers during the pandemic is likely to keep prices down. He states, “leisure low-cost carriers will be back to 2019 levels this summer, maybe even a little bit higher”.
Due to the ease in COVID-19 travel restrictions, and mask mandates around the country, as well as, the constant development of vaccines, improvement on its efficacy, and the way airlines are incentivizing leisure travel, a surge is expected in the upcoming months. A surge that is the ideal scenario for airlines, and which can work as a reparation for the drastic decrease in the number of business passengers.